Asset price volatility in a nonconvex general equilibrium model |
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Authors: | Costas Azariadis Shankha Chakraborty |
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Institution: | (1) Department of Economics, UCLA, Los Angeles, CA 90095-1477, USA (e-mail: schakrab@ucla.edu), US |
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Abstract: | Summary. Asset prices and returns are known to vary significantly more than␣output or aggregate consumption growth, and an order of
magnitude in excess of what is justified by innovations to fundamentals. We study excess price volatility in a lifecycle economy
with two assets (claims on capital and␣a public debt bubble), heterogeneous agents, and increasing returns to financial intermediation.
We show that a relatively modest nonconvexity generates a set valued equilibrium correspondence in asset prices, with two␣stable
branches. Price volatility is the outcome of an equilibrium selection mechanism, which mixes adaptive learning with “noise”,
and alternates stochastically between the two stable branches of the price correspondence.
Received: March 19, 1998; revised version: June 2, 1998 |
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Keywords: | and Phrases: Private information Costly state verification Asset price volatility Cycles |
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